Mergers And Acquisitions

Business Acquisition Funding Methodology

Table Of Contents

1. Introduction And Context
2. Scope And Operating Model
3. Standard Operating Procedure: Five Step Close
4. Underwriting Detail And Materials
5. Sources And Structures
6. Gap Financing: Purpose, Controls, Execution
7. Key Mechanics In An Acquisition
8. SPV, Security, And Intercreditor
9. Distribution Process And Bankability
10. Fees And Retainer Coverage
11. Client Benefits
12. FAQ
13. Glossary

Introduction And Context

Acquisitions fail when valuation gaps, incomplete diligence, and unclear debt terms collide with closing timetables. Sellers want certainty of funds. Credit committees want consistent numbers and workable covenants. Integration requires cash discipline from day one. Financely sequences the work so materials are decision grade, capital is matched to the business model, and closing mechanics are documented at the funds flow level.

Scope And Operating Model

Coverage includes senior term loans and revolvers, unitranche facilities, mezzanine and holdco PIK notes, seller notes with or without PIK, preferred equity, joint venture equity, earnouts, and R&W insurance coordination. Financely acts as advisor and arranger. Borrowers are acquisition SPVs or holding companies. All work is coordinated through the client portal with a single record of decisions and documents.

Standard Operating Procedure: Five Step Close

1. Engagement And Retainer. Mandate executed. Retainer received. Data room checklist and timetable released.
2. Underwriting. KYC and sanctions. QoE scope. Market and customer work. Synergy and one time cost map. Draft sources and uses. Draft covenant framework.
3. Term Sheet. Structure and pricing ranges. Leverage and coverage tests. Security and guarantees. Conditions precedent. Intercreditor outline. R&W insurance path where relevant.
4. Allocation And Documents. Lender allocations issued. Drafts circulated. CPs satisfied. Funds flow and working capital peg agreed with seller counsel.
5. Closing And Funding. Documents executed. Debt and equity funded. Escrows set. Hedging booked. Post close reporting initiated.

Underwriting Detail And Materials

Underwriting produces a bankable file. Core items include QoE on revenue and EBITDA, working capital analysis and peg, customer and supplier concentrations, churn and cohort metrics, backlog quality, legal diligence on contracts and consents, cyber and IT review, HR and benefits, tax and structuring memo, environmental exposure where applicable, historical financials with bridges, model with sensitivities, covenant forecast, and integration plan. Specialist contractors are engaged where depth is required. Outputs are consistent with lender models and legal drafting.

Sources And Structures

• Senior Term Loan And Revolver. First lien security. Amortization or bullet. Revolver sized to working capital seasonality with borrowing base where relevant.
• Unitranche. Single credit agreement with internal split of economics between first out and last out lenders under an agreement among lenders. Useful where speed and coordination matter.
• Mezzanine. Contractual subordination. Equity pledges at holdco or borrower. Warrants where pricing requires upside.
• Holdco PIK. Unsecured at a parent entity. Cash interest is preserved at opco. Often used for sponsor co invest or to bridge valuation.
• Seller Note And Rollover. Purchase price support that aligns incentives. Cash interest or PIK. Intercreditor terms define standstill and payment blocker periods.
• Preferred Equity Or JV Equity. Priority distributions with negotiated controls. Used when debt sizing is constrained and certainty is required.
• Earnout. Contingent consideration paid on clear KPIs. Drafted to avoid leakage and dispute. Not eligible as debt sizing in most cases.

Gap Financing: Purpose, Controls, Execution

Gap financing addresses equity shortfalls, purchase price moves, and timing differences between debt funding and completion accounts. The objective is to protect the timetable and maintain discipline on leverage and covenants.

• Sources. Preferred equity at holdco. Mezzanine behind senior. Short tenor bridge to a committed refinance. Seller note uplift with pricing aligned to risk. Limited vendor financing where contract permits.
• Controls. Intercreditor agreement. Blocked accounts and cash sweep triggers. Completion and cost reserves. Information and inspection rights. Reporting cadence aligned to CPs and integration milestones.
• Execution. Quantify the shortfall and tenor. Map sources and uses at closing. Issue a Gap Term Sheet with amount, pricing, covenants, and exit. Obtain indications from the panel. Settle intercreditor with senior agent. Execute, fund to escrow, and release on CP satisfaction. Exit is a refinance, asset sale proceeds, or cash sweep at defined thresholds.

Example. Enterprise value 50 million. Sources and uses show senior 3.0x EBITDA, mezzanine 1.0x, equity 2.0x including rollover. A 5 million increase in price is covered by preferred equity at holdco with a cash sweep and a refinance option after twelve months once synergies are realized and DSCR improves.

Key Mechanics In An Acquisition

• Purchase Agreement Interface. Debt provisions, conditionality, MAE definition, permitted leakage, and funds flow must align with credit documents.
• Working Capital Peg. Target level set from historical seasonality and policy. Settlement through completion accounts or escrow. Avoid double counting with earnouts.
• R And W Insurance. Reduces escrow and aligns seller incentives. Underwriter diligence must mirror QoE and legal findings.
• Consents And Change Of Control. Customer and vendor contracts reviewed early. Mitigation strategies include novations and side letters.
• Hedging. Interest rate and FX hedges aligned to notional and tenor. Collateral assignment and minimum counterparty ratings.
• Post Close Cash Control. Hard lockbox or springing cash management. Waterfall defines application to debt service, reserves, and distributions.

SPV, Security, And Intercreditor

The borrower is an acquisition SPV owned by a holdco. Security includes share pledges, all asset liens, and guarantees where required. Mezzanine or preferred equity ranking is governed by an intercreditor agreement that sets standstill, cure rights, payment waterfalls, and enforcement protocol. Cash accounts are controlled by the senior agent. Information rights and inspection cadence are set across the stack to avoid duplication and disputes.

Distribution Process And Bankability

Distribution is targeted to commercial banks, direct lenders, mezzanine funds, and equity partners that fit ticket size, sector, and jurisdiction. Indications are collected on a comparable template that captures rates, fees, covenants, baskets, call protection, MFN, and CPs. A transaction is bankable when EBITDA quality is demonstrated, customer concentration is manageable, churn and margin trends are stable, legal and tax positions are clean, management depth is credible, and documents reflect the economics without ambiguity.

Fees And Retainer Coverage

Retainer. Funds underwriting, materials, lender and investor engagement, data room build, timetable control, and decision logs. Third Party Costs. Legal, diligence, appraisal, insurance underwriting, and filings paid at cost against estimates. Success Fee. Payable at funding as agreed in the mandate. Retainers are not refundable once underwriting begins.

Client Benefits

FAQ

Can limited equity still close
Possible where leverage and coverage tests are met and where a documented gap solution sits behind the senior with proper controls. Seller rollover and a right sized earnout can further align incentives.

Will lenders size to pro forma synergies
Rarely at signing. Synergies are recognized after delivery with evidence. Interim covenants protect lenders while integration is proven.

How is the working capital peg set
Analysis of seasonality and policy changes across three years. Normalization for one time items. Settlement through completion accounts or escrow.

How does R And W insurance change the deal
Escrow is reduced. Underwriter diligence must align with QoE and legal findings. Exclusions are reviewed so risk is not unknowingly retained.

When is unitranche preferable
When speed, confidentiality, and a single credit decision are priorities. Where pricing tension is needed, senior plus mezzanine can be superior.

What most often delays closing
Late diligence issues, missing consents, tax structuring changes, and incomplete funds flow. Early alignment across counsel, lenders, and the seller avoids slippage.

Do you guarantee funding
No. Outcomes depend on credit quality, structure, documentation, and market appetite. Mandates are accepted where the file can be defended in front of decision makers.

Glossary

Agreement Among Lenders. Contract that allocates economics and controls between first out and last out lenders in a unitranche.

Borrowing Base. Formula that sets revolver availability against eligible receivables and inventory with reserves.

Cash Sweep. Redirection of excess cash to debt service or reserves when tests are not met.

Change Of Control Consent. Approval required from counterparties before closing to avoid default under key contracts.

Conditions Precedent. Requirements that must be satisfied before funding.

Debt Yield. EBITDA or NOI divided by loan amount. A sizing and exit test.

DSCR. Debt service coverage ratio calculated from EBITDA over cash interest and amortization.

Earnout. Contingent purchase price consideration payable on defined KPIs post close.

Escrow Or Holdback. Funds retained at closing to settle post closing adjustments or claims.

First Out And Last Out. Priority of principal and interest payments inside a unitranche stack.

Holdco PIK. Unsecured instrument at a parent company with payment in kind features to preserve operating cash.

Intercreditor. Agreement that defines ranking, remedies, cure rights, and cash control across finance parties.

MAE. Material adverse effect definition in the purchase agreement that can affect closing.

MFN. Most favored nation protection on subsequent debt to preserve economics for existing lenders.

QoE. Quality of earnings report that validates revenue, margins, and add backs.

R And W Insurance. Policy that insures seller representations and warranties with negotiated exclusions and retention.

Sources And Uses. Schedule that shows all capital sources and how they are applied at closing.

Springing Cash Management. Lockbox or hard cash control that activates when tests are breached.

Working Capital Peg. Target level of net working capital used to settle adjustments post close.

Financely is a capital advisory. The firm is not a bank. All outcomes are subject to KYC and AML, credit approval, documentation, and jurisdictional requirements. Work proceeds on a retained basis through the client portal.